Fixed-line telecommunications operator Telkom will put pressure on multinational IT and telecom equipment suppliers to sell equity in their SA operations to black shareholders, says CEO Papi Molotsane.
It's a move that is likely to send shock waves through the multinational vendor community. Though there have been a few notable exceptions, such as Unisys, SAP and UUNet, most international suppliers have strongly resisted proposals that they sell equity in their SA businesses.
Telkom has tremendous power to influence the course of empowerment, not only in the information & communications technology (ICT) industry, but across all business sectors, through its procurement spend. In the year to March 2005, it spent R8,4bn on procurement.
The company's move to get tough on suppliers that don't have black shareholders could prove controversial. Many foreign multinationals have strongly resisted proposals that the upcoming empowerment charter for the industry requires that they sell equity to conform with it. Well-known foreign companies, especially US firms such as Microsoft, IBM and Oracle, have resisted calls that the charter require them to sell equity.
They have argued strongly in favour of the introduction of "equity equivalents". These would allow them to score extra points in other categories of empowerment, such as enterprise development, skills development and employment equity, to make up for the points they don't score in the equity component of the charter.
Now, though, pressure from Telkom could finally force some of them to rethink their objections. Telkom spends billions of rand each year on network equipment from companies such as the US's Cisco Systems, France's Alcatel and Germany's Siemens. It also regularly issues large tenders for back-office hardware and software systems, the kind supplied by companies such as IBM, Microsoft, Oracle and Hewlett-Packard.
"Winning the understanding of the multinationals will be a big challenge," says Motlatsi Nzeku, Telkom group executive for procurement services. "A lot of these companies are still not convinced that selling equity to black shareholders will add value to their businesses. They often say they were doing good business before black economic empowerment (BEE) and that they are waiting for the charter before they can do anything on black equity ownership.
"We must pull them along this year and win their understanding in supporting [Telkom's objectives]," he says.
The practice whereby multinationals work through fulfilments agents - where local partners act as resellers to multinationals - does not sufficiently address the demands of BEE, he says.
Often multinationals have an official presence in the country but use their resellers to address empowerment conditions. Resellers simply become middlemen. "They earn their margins by adding handling fees and therefore add costs to Telkom's business. This model is simply not sustainable. Undoubtedly, we would like multinationals to sell equity to credible blacks in their SA operations."
Molotsane agrees with Nzeku. "We are well-placed to put pressure on these organisations and we will not abdicate that responsibility."
Nzeku says fronting has escalated in the past year, especially among small companies. Telkom is determined to overcome the problem. It is its tough approach to empowerment, alongside the rigour in its evaluation and monitoring models and various broad empowerment initiatives, that has resulted in Telkom performing consistently well in the Top Empowerment Companies survey.
Though it has slipped slightly in the overall rankings in 2006's survey - from position one to position five - it is still the most empowered company in the ICT sector. It scores particularly well in preferential procurement, skills development and employment equity.
Nzeku says Telkom has done well in empowerment because it believes it is the right thing to do and not because it has felt pressure from government. "We are doing it because we believe it unlocks talent and improves our competitiveness and not because we are running away from a big stick or penalties."
Telkom has approached empowerment with vigour. The company has transformed itself dramatically in the past 10 years. When it started its empowerment initiatives in 1997, only R54m/year was spent on procuring goods and services from back-owned and black-managed companies. Today, that figure has risen to R5,24bn and accounts for 61,9% of all procurement spend.
Nzeku says Telkom has contracted more than 4 000 small black-owned companies and individuals as suppliers over the past 10 years. It has continued to work with many of them, assisting them to run their businesses, even beyond Telkom. It has trained 1 370 suppliers on basic business and financial management. "We want to make sure that our suppliers are credible and sustainable businesses because if they fail it will affect our delivery to our customers," Nzeku says.
Internal skills development is also critical to the company, particularly as it begins reinventing itself as a broader ICT solutions service provider. Telkom is gradually changing its network to one based on Internet technologies. In technical terms, it is moving from a network built on a circuit-switched telecom infrastructure to a packet-switched environment based on the Internet Protocol (IP). This is a dramatic change and will require the reskilling of many of Telkom's technicians and engineers in the next few years.
"It is critically important for our employees to reskill themselves around IP," says Molotsane. "Our employees must be proactive, realise where the organisation is going and decide what to do to make themselves relevant."
The company has embarked on a number of initiatives to achieve this, and sends staff to telecom carriers abroad to learn about global trends in the telecom industry.
Employment equity has been a particular focus for Telkom in recent years. More than 55% of its employees are black. At senior management level, that figure is more than 70%.
The past year has been important for Telkom's empowerment initiatives at the equity level, too. It concluded an empowerment transaction - the controversial deal where the state-owned investment manager, the Public Investment Corp, sold 6,7% of Telkom to the Elephant Consortium.
Despite this deal, it's still not clear whether Telkom will meet the equity requirements of the ICT sector charter, which should finally be concluded this year. If it doesn't, government, which still holds 37,7% of Telkom's equity, might have to consider selling some of its remaining stake in the company.
